Skip to Content
Call Us Today! 866-458-7966
Top

Wayfair Creates New Tax Burdens for Online Retailers

|

The Supreme Court’s ruling in June 2018 the country’s sales tax rules forever. Specifically, in South Dakota vs. Wayfair, the Supreme Court did away with the physical presence test and gave the states the ability to require tax collection based on economic nexus. As a result, gone are the days that you can shop online “tax-free.”  

From a technical perspective, the case dealt with a concept called “nexus.”  Nexus, a fancy word for connection, means that if a company has enough of a connection with a state it must abide by its tax rules. In other words, before Wayfair, a company only had to charge and collect tax if it had a physical presence in a state. But now, however, the company will be treated as having the physical presence if it has over a sales threshold into the state.  

For example, Business A is located in Florida and makes sales into your state. Business A makes sales mostly to your state and Florida residents, collecting tax on Florida sales but not collecting tax on your state’s sales. As Business A makes an increasing amount of sales into your state, it decides it would be a great business strategy to have a warehouse location in your state. But once the warehouse opens, the state takes the position that now Business A has “nexus” with your state and therefore it must collect and remit sales tax on all sales made into your state.

In the scenario described above, Business A has nexus with Florida because it is located in Florida. But Business A “creates” nexus with your state by opening a physical location within the state. Until June 2018, this physical presence standard was the law of the land. If you, your business, your employees, your inventory, or other items/people (even independent contractors!) were physically present in a state, nexus attached to your business and you were required, as a result, to register to collect and remit that state’s sales tax. Businesses had to be extremely careful where they operated their business if they did not want to collect sales tax. 

In short, nexus was like a disease that came from physical contact. If you don’t want to catch it, don’t touch the state. But for online businesses that were based in one state but made sales over the internet, the nexus problem was great for business. With no locations, online companies could avoid getting nexus with, in theory, every single state except for the one in which they were located. As shoppers increasingly relied upon the internet for their purchases, states lost an incredible amount of sales tax revenue. 

States like your own believed they were losing significant revenue due to the alleged outdated physical presence rule.  As a result, the concept of economic nexus emerged. Economic nexus is a sales threshold that, once met, automatically attaches nexus to a state regardless of any physical presence. 

States across the country are adopting economic sales tax nexus thresholds at a rapid rate. Many states have different thresholds that go into effect at different times. The most popular economic nexus threshold is $100,000 of sales made into a state within a one-year period or 200 separate transactions made into a state within a one-year period. If you meet this threshold, you’ve got nexus!

Since June 2018, many clients have called concerned about how this new definition of nexus will affect their business. To prepare and adapt to the changing law, our team can perform a sales tax study to determine your potential exposure by state.  In short, we evaluate your company financials in context with the most up to date nexus laws and regulations and identify which states will take the position you should be collecting and remitting tax. With each state having a different threshold, different effective dates, different procedures for registration, and different associated nexus rules, all of which are changing in the wake of the June 2018 case, it is vital a nexus study be performed with great care and expertise. 

Once those states are identified, a nexus study can evaluate what your tax exposures are and how best to limit any potential past liabilities. When faced with 20 states that expect back taxes paid upon registration, the failure to properly execute a registration plan can have potentially devastating results. Even if you are only dealing with one state, certain states take aggressive positions on the effective date of their economic nexus thresholds, and there could be a serious liability to deal with upon registering in that state. 

Once past liabilities are dealt with, a nexus study can give direction on how and when to implement changes going forward. Some states, such as Florida, still do not have an economic nexus threshold while others have thresholds that have been effective. It is likely only a matter of time until all states adopt some sort of threshold. Is your business ready for these anticipated changes? Once a threshold is announced, there is often only a short window for taxpayers to register and become compliant by the effective date. Many taxpayers simply don’t have the systems in place to adopt these changes in an efficient manner and may need guidance on how to best implement these changes.  

If the definition of sales tax nexus was not clear to business owners prior to June 2018, it must be understood going forward. States have been waiting for more than a decade to impose their taxing authority on out-of-state businesses making sales into their states. Taxpayers should anticipate the aggressive enforcement of this new definition of nexus and the varying thresholds across the country. Nexus studies are available to determine where your business has nexus, what your exposure is for back taxes in those states, when and how to register, and what practices and procedures to implement in your business going forward to avoid future audit assessments. Those who are not proactive in adapting to the evolving nexus standards of each state may suffer the consequences when audits are initiated by states looking to recoup some of the revenue they’ve been losing out on all these years.